Rockwell Automation at Wells Fargo Conference: Navigating Economic Uncertainty

On Thursday, 12 June 2025, Rockwell Automation (NYSE:ROK) executives addressed the Wells Fargo Industrials & Materials Conference 2025. The company discussed its strategic approach to managing demand resilience amidst economic uncertainty. While product demand shows positive trends, capital equipment demand faces challenges due to project delays in key sectors. Rockwell’s strategic focus includes managing tariff impacts and investing in manufacturing and software to enhance margins.

Key Takeaways

• Rockwell Automation is experiencing increased demand for products, though capital equipment demand is hindered by project delays in automotive and energy sectors.
• Strategic investments are being made in manufacturing processes and software, aiming for margin expansion.
• Tariff-related costs are being managed through strategic pricing and supply chain adjustments.
• The company is focusing on integrating acquisitions like ClearPath and Cubic to boost profitability.
• Channel inventory destocking, completed in Q2 fiscal 2024, has removed a buffer that previously suppressed demand.

Financial Results

• Tariffs: Initial $125 million headwind revised to $70 million, with $20 million from Canada and Mexico, $20 million from China, and $15 million from acquisitions and other factors.
• Volume: Intelligent Devices and Software & Control volumes remain below 2019 levels, particularly in the Logix product category.
• Margins: Intelligent Devices margins are expanding, targeting a 22% to 24% operating margin, while Software & Control aims for 31% to 34%.
• Acquisitions: ClearPath is expected to be breakeven in fiscal 2025 and profitable by 2026. Cubic requires further investment.
• Capital Expenditure: Historically 2% of sales, with potential to increase to 3% based on ROI.

Operational Updates

• Demand: Product demand is up, but capital equipment demand faces delays. Maintenance, repair, and operations (MRO) are progressing well.
• Revenue Mix: Two-thirds driven by capital expenditure, with a shift towards more greenfield projects in e-commerce and warehouse automation.
• Greenfield Activity: Strong growth in e-commerce, warehouse automation, and data centers, with life sciences exceeding expectations.
• Software: Emphasis on scalable, flexible software for production design and automation.
• Channel Inventory: Destocking completed in Q2 fiscal 2024, affecting distributor inventory levels.

Future Outlook

• General: Potential growth in Intelligent Devices and Software & Control volumes, with continued margin expansion and cost reductions.
• Capital Expenditure: Shift to a more asset-intensive model, with potential CapEx increase to 3% of sales.
• Acquisitions: Focus on integrating existing businesses, with openness to M&A activities in the production environment.

Q&A Highlights

• Customer Spending: Project modifications to ensure ROI, with ongoing spending in autonomous mobile robots, software, and cybersecurity.
• Tariffs: Strategic price increases in response to tariffs, mostly in low to mid-single-digit range.
• Rare Earth Elements: Supply chain strategies include building a buffer to mitigate disruptions.
• Competitive Positioning: No investment in product lifecycle management, CAD, or EDA.

For a comprehensive understanding, readers are encouraged to refer to the full transcript.

Full transcript - Wells Fargo Industrials & Materials Conference 2025:

Joe O’Dea, Analyst: Alright. Good morning, everyone. I’m Joe O’Dea. Really happy to kick off day three with Rockwell Automation and Christian Rothe, CFO, and Ajana Zellner, who runs IR and market strategy. Thank you so much for being with us this morning.

Christian Rothe, CFO, Rockwell Automation: For having us. Good morning. Good to hear.

Joe O’Dea, Analyst: Good morning. Day three. Right? Day three. Yeah.

Christian Rothe, CFO, Rockwell Automation: You were I saw you in the gym this morning. You were working out hard, so you

Joe O’Dea, Analyst: you still got plenty of energy. Going hard. Right? Yep. Exactly.

So ready to rock. Good one. Oh, boy.

Ajana Zellner, Runs IR and market strategy, Rockwell Automation: Even more of that coming. Sure.

Joe O’Dea, Analyst: Let’s let’s start on the demand side and in terms of what seems like resilience on customer spending patterns despite what we’re seeing on elevated uncertainty. And so the the question is really why. You know, why why have we seen it’s not the acceleration that maybe we were hoping for, but it’s also not necessarily deterioration that we might have been fearing. So what what you’re hearing from customers out there on that resilience.

Christian Rothe, CFO, Rockwell Automation: Yeah. Maybe I’ll I’ll split it up in a couple different pieces. So the part is that the the product side of the business is it’s coming together nicely, and we are definitely seeing an uptick in in the demand side for the product portion of our business. And really, those are some of the fundamentals that you would see maybe at the early point of a cycle. Right?

It’s you know, we have labor availability issues, labor cost issues, people continue to try to drive efficiency in their operations, especially especially in the light of uncertainty. The the other portion of it, though, that, again, we we would hope is going to come together better, but it’s not yet, is really the capital equipment demand side. The more capital intensive projects for our customers, that uncertainty that I mentioned that is maybe helping a little bit for folks investing, trying to continue to keep their operations running, but without larger projects, it’s hurting us on larger projects. And so we’re seeing that come through in the life cycle services portion of our business as well as the, configured order portion of our intelligent devices business. So that, that portion, you know, we’re we still got some runway there.

We need to see maybe some of that uncertainty, fall away.

Joe O’Dea, Analyst: And and and just to dig in on that a little bit more and and the demand patterns you’ve seen in life cycle and the configure to order, as we started this year, things were getting a little bit better. Right? And we saw it within the PMI trends. And so were you seeing momentum build in some of the more CapEx intensive, heavier spend areas and and then that paused? Yeah.

And let’s just to to frame it, the when

Christian Rothe, CFO, Rockwell Automation: we talk about the demand side, when we’re talking about that sort of activity, it’s really not the booking side of it. It’s really the the quotation side of it. That is, you know, whether we’re doing a a budgetary quote for a customer or we’re actually getting farther into a a project, that activity level was pretty good as we exited last year and and came into this year. And, frankly, there’s there’s still a bunch of it that’s that’s in the works. And so when we talk about a delay and customer delays, it’s really delaying them from taking a quotation to an actual booking for us.

So it’s not, so it’s definitely showing up in our orders. Don’t, don’t don’t have a mistake about that, but, it’s really about getting them over the finish line. Now at the same time, those customers, in fact, I just was having a conversation this week with some of our leaders, those customers are not abandoning their projects. They’re not canceling the projects. There’s obviously some modifications that they’re doing.

They’re working hard. Those customers are working hard to try to make sure that there’s a great ROI for them, which is exactly what, frankly, you would expect them to do in this moment of uncertainty.

Ajana Zellner, Runs IR and market strategy, Rockwell Automation: Yeah. And I’ll just add that the project delays we saw in q two, a lot of them, were centered around automotive and energy. And energy, you know, the life cycle services being a little bit more in-depth towards process industries. That’s where you see that impact on projects, on capital intensive projects.

Joe O’Dea, Analyst: Got it. And then I wanted to talk about revenue mix a little bit and the the MRO side versus brownfield, greenfield side. And so just what what the mix is and then what you’ve seen in those different sleeves.

Christian Rothe, CFO, Rockwell Automation: Sure. You wanna take that one?

Ajana Zellner, Runs IR and market strategy, Rockwell Automation: Yeah. Sure. So, historically, we’ve had about two thirds of our business driven by CapEx and about a of it by MRO. Right? And within CapEx, historically, it’s been a lot of brownfield brownfield upgrades, expansions.

Now more recently, we’re seeing more and more greenfield in terms of the the projects going forward. But in general, the the majority of our business is driven by these big CapEx projects that that historically been brownfield. So so that’s kind of the the the breakdown. What you see with MRO, as Christian mentioned, that’s where we saw some good good progress in q two, good flow. Now there are still projects going on.

It’s just some of the bigger CapEx projects that are being delayed. Uncertainty, and it really depends on each industry and what’s driving the behavior there. Some of it is tariff cost and uncertainty and come customers trying to figure out what happens to their global supply chain footprint. Some of it is consumer driven and what’s adoption of certain things, and what’s the preference in the in the in the in the macro situation. Some of it is policy, right, if you look at energy and renewables.

So every some of it is low commodity pricing. And and so there are different drivers for spending and there are different drivers for some of the delay in in in customers triggering that bigger spend, but we still see very good demand for productivity efficiency. We talked about it. Even these customers that are that are in the industries that are challenged, automotive or energy, they are spending. They’re spending on our autonomous mobile robots.

They’re spending on our software. They’re spending on our cybersecurity services. So they’re effectively trying to increase their production capacity by increasing their throughput, reducing quality issues, and and being more efficient.

Joe O’Dea, Analyst: And and on the the greenfield side of things and where you’re seeing a little bit of activity there just in terms of the verticals. I mean, I know you’ve raised the the outlook for things like warehouse and ecommerce, but just where those verticals are that are seeing some of the greenfield activity.

Ajana Zellner, Runs IR and market strategy, Rockwell Automation: Yeah. You’re right. So we increased outlook for several industries in our fiscal q two. Ecommerce and warehouse automation is doing is continuing to be a very strong vertical for us. It’s a combination of ecommerce as an industry and also warehouse automation as a as an application across many industries.

And we see a combination of greenfield and brownfield investments in that bucket. Ecommerce, we do see after a period of digestion of in fiscal twenty four, we we see more build out of new fulfillment centers, so the greenfield. When you look at warehouse automation broadly and a lot of companies, whether it’s parcel companies, companies, whether it’s traditional retailers that are trying to upgrade their existing warehouses, modernize them. They want to either catch up with their competitors or leapfrog them. That’s a lot of brownfield.

It’s a lot of and it’s a lot of core automation we provide there. So our logics controllers, our drives, our software. So we are seeing both of those firing on on all cylinders right now. And in addition to that, we see some business with data centers. It’s not a big part of our revenue, but we do have some exposure to to the power distribution side of the data center business through our acquisition of Cubic.

And that’s growing strong double digits, and we we expect that to be a a durable demand. So that bucket is a combination of greenfield and brownfield. Life science is another industry where we saw good performance better than we expected in the quarter, and we increased our outlook for the full year. And that’s where we see also a combination of greenfield and brownfield investments. And then there’s some parts of process industries where it’s a lot of it is it’s not necessarily a greenfield investment, but a lot of upgrades, a lot of aging equipment, aging infrastructure that needs to be updated, that, you know, you have to have efficiency.

You have to have ability to handle more data and security. So we see that kind of across the board.

Joe O’Dea, Analyst: If if you take your own spend plans as an example, are there a number of projects that you’d like to move forward on? But given a little bit of uncertainty out there, you you’re trying to choose the right timing. And and and so just to get a sense of customers are spending, like you said, but we’re trying to think about the wave of spend that could be held back right now and and moving forward. And do you kinda have that playbook?

Christian Rothe, CFO, Rockwell Automation: Yeah. I mean, there’s definitely a number of factors when you’re looking at projects inside an organization, that you look at. And, absolutely, there are, you know, changing dynamics, the things that are in your control and things that are outside of your control. The things that are outside of your control are the frustrating ones. And so, yes, there’s obviously, we have resiliency in our organization.

We, we are using some of that resiliency to try to avoid some of these, some of these costs that are coming in. But there’s other things that we potentially can make some investment in to try to avoid some of those costs, which is which is fine. But are you doing it for a temporary purpose or a long term purpose, and how do you think about it from the perspective of, you know, whether or not that’s a large investment and and can we really dig deep roots with that, or are we doing it for, you know, a really transitory reason? And so that absolutely goes into the into decision decision making process. And the honest truth is is that if it feels like it’s a temporary thing, we go back and we do our work another time through or three times through or five times through just to make sure that we are gonna get the ROI on our investment, and that usually ends up with some modifications to the project.

But underlying the whole thing, the notion, the underlying, you know, reason why we wanna do it to begin with, it’s not just typically driven by those outside forces. It’s driven by something on the inside that we really are driving towards. So whether it be, you know, new market growth or going after, you know, assisting some of our new product development launches, those kind of things. And so it starts at its core with good strategy, but then, again, some of these other factors can be really influential to it, which is, you know, really where you were going with the question, which is, well, is that happening with your customers? And I think, absolutely, that’s happening with our customers.

Yeah.

Joe O’Dea, Analyst: And when you talk about the pent up nature of demand that’s out there and talking about aging equipment and replacing it, like, are they just getting to a point where you you can’t push it out anymore? Are you are you experiencing any of that?

Christian Rothe, CFO, Rockwell Automation: Yeah. I think that’s part of what, again, what we would do in our own organization, which is, hey. We really were interested in doing this, and maybe we’re not gonna be in a position where we wanna invest millions of dollars because of all these other uncertainty factors. But, you know, you do get a little bit hooked on, okay, but this was a great opportunity for us. Are you sure there’s not something else we can do to turn and so you modify it, you you know, either downsize it or you or you change it, you know, in a in a different way to try to ensure that you can still go after the original objective.

Joe O’Dea, Analyst: Then shifting to the tariff discussion, just walk us through kind of the sizing of those costs, how that’s developed over the course of the last couple of months Sure. In addition to what we’re seeing on steel and aluminum and the latest there?

Christian Rothe, CFO, Rockwell Automation: Yes. So the, at our Q2 call, I I would have given an update around what our second half costs were for fiscal twenty five. That number at that moment in time, with the data points that were available at that moment in time, was $125,000,000 of headwind, and we were, in a position to recover on that from an EPS perspective, via supply chain works workarounds as well as, as well as pricing recovery. That since then has changed, obviously, with some of the China tariffs, moving around a little bit. So that number went from one twenty five down to 70.

Maybe to put it in context around what drives that 70, it’s about 20,000,000 that is, from Canada and Mexico that is non USMCA compliant. There’s a little bit of work that we can do there to to try to help that. Some of it is, it’s gonna be hard to be able to to make it compliant. There’s about 20,000,000 that is related to China, both going both directions, and then 15,000,000 that is related to recently acquired businesses that that are, you know, different impacts from from an organizational perspective. Right?

Those customers tend to tend to be a little more focused in certain verticals. So we’re working through some of those and then 15,000,000 through a variety of other factors, a portion of which is, is still in aluminum tariffs. It’s still a relatively small number for us. So now your next question is, okay. That 70,000,000, that was the the number that we would have given, I don’t know, three, four weeks ago, you know, so after the China matters, but but before the changes on the, the steel and aluminum tariffs that we recently saw.

So, again, relatively minor. We’re not giving out exactly what that number is partially because it wasn’t just taking, taking that tariff number up. But there were a couple other subsections in there, that require some a little bit more analytics on our side. But, again, it’s not a huge number for us. It’s, it’s definitely in the in the grand scheme, even in that 70,000,000, it’s relatively immaterial.

Joe O’Dea, Analyst: And then when we see headline figures like 145 tariffs, we think about what kind of price impact does that mean customers are going to have to absorb, but there’s also kind of spreading it Any perspective on some of the largest price increases that you’ve had to put in place in in response to tariffs?

Christian Rothe, CFO, Rockwell Automation: Yeah. So, you know, the the approach that we’re taking on tariffs, is that we are when we’re recovering with price, we’re trying to be fairly surgical in our approach to it. That is we have just under just under a thousand, product family codes that we use inside the organization for our 300,000 plus SKUs. In with various tariffs, when we’re making changes, we might impact price on 75 to a 150 different product families, just, again, depending on where, where the product is coming from and and all the shipping methods that we’re using. And so that is, again, a fairly narrow group, and we try to be, again, strategic around what we’re doing with regional pricing even.

So, generally, I would say that most of our price changes related to tariffs have been in the kind of low single digit, mid single digit range. There are a few few that are higher than that, and the ones that are higher than that are, areas where we, you know, things like non USMCA compliant, that have a, a margin profile that are that is not as favorable as some of our base business. So, you know, if you have a higher cost, obviously, and it’s tariffed, then you have a bigger, lift on the on the price recovery. But those are fairly, minimal in the in the grand scheme of things for us. And I would think of it more like configure to order type of product where it’s more project related, and so we can we can build that in relatively easily.

Joe O’Dea, Analyst: And anything on rare earth elements in terms of exposure? And it seems like maybe we’re seeing a little bit better environment developed in the in the latest stuff. But but just your exposure there, any supply chain considerations for you?

Christian Rothe, CFO, Rockwell Automation: Yeah. I mean, rare earths are I I don’t think you’re having any industrials at this conference that would tell you that, oh, we have no rare earth. Right? It’s there. We all have it.

And so if, you know, if rare earths never come out of China ever again, then we’re all in trouble for a a variety of reasons. And so it’s probably just as much of a concern for us around our customer base and what it means for our customers than it is for us in our own business. That being said, you know, our team our our supply chain team did a pretty good job, trying to get ahead of things. And so, you know, we’ve got some buffer there. But, again, if we never get any rare earth ever again, we’ll have a problem just as as will our customers.

So, you know, they’re it’s not a huge portion of the spend, but it can be critical on certain components and products.

Joe O’Dea, Analyst: Then wanted to shift to to cycle and with the amount of pricing that was required over the last number of years, trying to think about the volume side of the cycle. And so when when we look at, let’s say, 24 versus 2019 and think about kinda ITD and think about software and control, you know, anywhere from kinda 10 to 17% growth between between those two segments if you look over that entire period of time. I would imagine a pretty significant amount of that is is price related. And so where are we on the volume side when when we think about the cycle? And and and where are you where are we strong on the volume side and and conversely a little bit softer?

Christian Rothe, CFO, Rockwell Automation: Yeah. So maybe I’ll start, and Ajana can can jump in. of all, I I appreciate talking about over a five year window. You know, so often folks get focused on year over year. For me, I’m a big believer in CAGRs.

I I believe that, when you think about evaluating performance, for us as an organization, frankly, for salespeople, frankly, for salespeople, for distributor partners, for, you know, all sorts of things. It’s it’s really about the multiyear stack, and it’s about the CAGRs that you get over a longer period of time. Right? Anybody can have, you know, an easy comp from the prior year and and post a big number. But, you know, having a really solid number over a longer period of time, that’s really how I tend to think.

So I I appreciate the way you’re you’re thinking about it. So, that being said, when you talk about intelligent devices and software and control, and and you I think the the math you did was a 10% growth. Again, that’s not a CAGR. Right? 10% growth for intelligent devices, kind of from ’19 to twenty four, seventeen.

Is that Exactly. Software and control. For software and control. And you’re absolutely right. Most of that is pricing.

And so the end answer is is that we are down in volume in both of those businesses compared to 2019. And we did talk about on our q two call that that the Logix business and and our Logix product category, which is, you know, upwards of half of the software and control business, it is still below 2019 levels as well. So in the when you think about the runway then that we have in those businesses, you know, both of them have a fair bit of runway on the volume side, which is good. Now I think you asked about mix as well in there. And

Joe O’Dea, Analyst: Let’s go to mix. Yeah. Yeah. So,

Christian Rothe, CFO, Rockwell Automation: you know, the mix side on, you know, on software control has adjusted somewhat, over time just because we’ve done a number of transaction acquisitions that have added more software to our portfolio, which is a good thing. It’s given us a little bit better growth rate. That growth rate is part of the reason why you have that 17% versus the 10%, for intelligent devices. So, software and control is, has a a mix that is, again, you know, a pretty good mix between the the software portion and and what is logics and and the product side. When you talk about intelligent devices, we’ve been talking about, like, even this morning around how the capital equipment environment is a more difficult one with the uncertainty that’s the the uncertainty overhang.

And so that is impacting the CTO business, configure to order. And so while the product portion of intelligent devices volumes are down from twenty nineteen, the configure to order portion is even a bigger drag.

Joe O’Dea, Analyst: That’s helpful. If you have a question, just raise your hand, and I’ll and I’ll get to you. Let’s talk about margins. We’ll do it kinda segment by segment. So so ITD, I think you’re on pace.

Like, back half of this year, looks like it would be tracking we’ll do the fiber thing again. A little bit a little bit below, like, eighteen, nineteen levels.

Christian Rothe, CFO, Rockwell Automation: Yep.

Joe O’Dea, Analyst: Talk about, again, like, the mix side of things, the acquisitions that have come into the portfolio as well as well as just, you know, the cost burden of an inflationary environment Yeah. As as as we think about where you are today on margins versus none?

Christian Rothe, CFO, Rockwell Automation: You probably could talk about this one for for a while. But, so Intelligent Devices, you’re right. We the momentum is good. Right? We’ve got some, some margin expansion that’s happened, you know, over the last couple of quarters, which is great, and again, optimism for the remainder of the year.

But even for the full year, we’re gonna be down on the volume side year over year sorry, down on sales year over year, which also, obviously, is also translating to volume. And so the, that that definitely is a pressure point for us. When you put it against that 2019 time frame, and you to put it in context, you know, if if I were to think about 2025 sales dollars and and where we’re tracking, just take some numbers and annualize them. We’re we’re we’re gonna be ahead of 2019 from a a sales dollars perspective. But that gap gap up is really acquisition related.

So in in particular, the the ClearPath and Cubic transactions, both of those are dilutive to margins. And so that would be a the biggest driver around what’s happening with the margin profile from Intelligent Devices from kind of that ’19 to to ’24, ’25 time frame. To put it a different way, you know, yes, we’ve gotten price that, you know, is essentially offsetting the volume. And and so then there’s the and there’s definitely been an inflationary environment. Price cost has has not necessarily been the best during that time frame.

That’s part of the reason why we’re in the midst of a margin expansion and cost reduction activity right now, intelligent devices being one of the largest beneficiaries of that. Yep. So there’s a there’s a good opportunity there. You know, we we have a corridor that we’re targeting of 22 to 24% segment operating margin for that business. That is a is a to and through kind of number.

That is it’s not a ceiling. So, you know, we wanna run after it, achieve it. And then, after we do, we’ll we’ll talk about the next step.

Joe O’Dea, Analyst: When you think about that ’22 to ’24 or software and control, 31 to 34, the path there, any kind of dimensioning of how much of that is self help? How much of that is volume dependent?

Christian Rothe, CFO, Rockwell Automation: Yeah. Definitely, volume dependency is there. Right? We we I don’t think we can do it without without volume coming back even to to 2019 or or better kinda levels. But the self help program is a good one.

And it it’s today where we are right now, where we’ve taken a bunch of, costs out, and I’m sure we’ll probably talk about this in more detail. You know, it started with more SG and A related expenses, but now we’re really digging into things that are more cost of goods sold related. And that really, again, that happens in waves. The couple of waves have been more focused on logistics cost, direct material cost. But I think as we as we continue to mature the program, you’re gonna see us do things more around operational efficiency, which is outstanding.

Joe O’Dea, Analyst: Shifting to channel inventory and some of the distortions we saw in in ’23 and ’24, and I’m sure it’s not a perfect science in terms of of sizing, but any perspective as you’ve evaluated that on what you saw from the magnitude of channel inventory stocking contribution to growth? And in particular, in ’24, what that contribution was to the organic declines?

Christian Rothe, CFO, Rockwell Automation: Yes. So I think the story actually goes back to ’22. Obviously, I wasn’t I wasn’t at Rockwell at the time, but I I certainly have been studying kind of some of what happened. And I think it’s important to to know that history. So, you know, as we think about forecasting, as we think about trying to make sure that, we don’t have some of these matters happen to us again, that we should be really cognizant of how it came together and, and what levers we would pull having perfect information in hindsight.

And so it really it started back in ’22, you know, with supply chain crisis. Their, you know, demand levels had increased dramatically, and so there was already a ramp ramp that was happening then that was driving a larger backlog. And, of course, as we all know, the supply chain crisis happened and things started self perpetuating. Right? And so can’t deliver, lead times go up, people have to order more because they don’t wanna get stuck, you know, blah blah blah.

And so that that really developed. You know, it started in ’22, built late twenty two, and then developed during the course of ’23. And ’23 is kinda where we, peaked out on our incoming orders, and then started to to crater on the incoming orders as, we exited ’23 and went into ’24. But we were shipping off of a heck of a lot of backlog, all the way through, frankly, the first quarter and a half, maybe two quarters of fiscal half of Yeah. Of fiscal twenty four.

So, you know, there was a there was a lot of backlog reduction that happened even in, you know, let’s say, fifteen, eighteen months ago. So the and and that, of course, then generated the the high inventory levels in our channel. And so the high inventory levels in our channel then had to work their way down, and that really was a half of, let’s say, q two to q four event for fiscal twenty four. So there was a lot of movement that occurred during that time frame. And, you know, this is my really long answer of not giving you an answer.

So dimensionalizing is, you know, I I have views around the dimensions around it just because I can see the I I have visibility to what the actual distributor inventory levels were. It was definitely material, and it was, it really did move things around a fair bit. So, you know and and we did go back and do some analytic work around. Okay. If they hadn’t had the overstock, what would demand have actually looked like for us based on what their demand was?

And, you know, it the the good news is is that they did not have, you know, while it may have looked like we went through a serious trough period around a lack of demand, the demand on them actually was relatively good during that time frame.

Ajana Zellner, Runs IR and market strategy, Rockwell Automation: Well, the good news now is we’re largely done with this destocking. Yeah. And so now we we don’t have to worry about that buffer, right, that that’s suppressing that underlying demand.

Joe O’Dea, Analyst: Switching to the software side, I think there’s a fair amount of focus on required investments in software and and more on competitive positioning. So just just talk about your approach to software and and and in particular, your your competitive positioning there.

Christian Rothe, CFO, Rockwell Automation: Do wanna do that?

Ajana Zellner, Runs IR and market strategy, Rockwell Automation: Sure. We we have been investing intentionally with speed and urgency in our software portfolio. We we are really, we have built out a leading portfolio of scalable and flexible software, both on prem and cloud native over the years. And in the space where we play in, space of production design and production automation, we think our portfolio is to none. And if you look at how we approach it, we look at the the customer investment life cycle.

So from the design of their systems and plants to operating them in runtime and then maintaining them and then upgrading them. And throughout their entire life cycle, we have a leading portfolio of both on prem and cloud native software offerings. So we can meet customers where they are, and depending on what their use case is, which plan they’re trying to optimize or what they’re trying to do, we have leading leading offerings. So we’ve invested in r and d. We’ve developed on the design side industry cloud native design environment, which, you know, certainly gives us a leg up in terms of how we develop, how we optimize, and also helps us with our generative AI offerings and capabilities as well.

We look at operating within that operate and maintain phases, as I mentioned. We bought companies like Plex and Fix, leading cloud native companies that actually have these offerings at scale. So that’s helping us really penetrate and and help customers drive even more productivity, even more yield, even in across industries that are already pretty automated today. So if you look at acquisitions, this is where we bought these companies in that space. Some of our competition is investing quite a bit in other areas of software, from a technology stack standpoint, in areas like product life cycle management or computer aided design or EDA.

These are not the areas that we’ll we’ll replay. And so while it may seem like there’s a lot of activity in the software acquisition space, that’s not the area that that we view as strategic to our growth longer term.

Joe O’Dea, Analyst: Got it. And I should have asked this earlier, but related to the acquisitions comment when when you talk about something like ClearPath and Cubic, you think about the margins getting better. What kind of margin trajectory do they have in front of them? For how long might that be a drag on segment margins?

Christian Rothe, CFO, Rockwell Automation: Yes. So ClearPath is an interesting one from when we bought that business, we we were very clear that that was a loss making business when we bought it, and that the target is for it to be breakeven in fiscal twenty to be profitable in fiscal twenty six. And so, you know, next year is a is a big year for them. So, you know, in and I I do love moments where you go from a a negative earnings number to a positive earnings number because it actually does you know, you get a little bit of a double up benefit. So, you know, the the expectation is that they do go into profitability and they continue to drive, you know, their their profitability much higher.

That’s really a revenue game. Right? It’s it’s gotta be driven by leverage on the on the p and l because we have a great infrastructure in place. The infrastructure is oversized for the volume of the business that we have today, which is fine because the growth rate is great. It’s a double digit grower, and and that’s the reason why we bought it bought it, and we believe that it’s a great solution for our customers.

On the Cubic side, Cubic is a business that, because it is capturing a lot of growth opportunities right now, we need to continue to invest more heavily in that business. And that’s brick and mortar, as well as, OpEx, for the business. And so, we’re committed to it. We like the runway in that business. And as long as we can continue to drive that growth, I think we’re going be willing to continue to invest.

Now a lot of the CapEx investment is mostly behind us. It’s really now about trying to get it to be fully optimized. And so that does have an opportunity to bring a better margin profile, in the near term than maybe ClearPath does because, again, ClearPath is coming from a lower position in that.

Joe O’Dea, Analyst: And then on on acquisitions, you’ve talked about a pause. How long do you think about a pause being in place?

Christian Rothe, CFO, Rockwell Automation: Yeah. We’ve, obviously, our balance sheet’s in a good spot. So it’s not necessarily a pause from a capital deployment perspective. It’s more of a pause with regard to we wanted to make sure that we did a really good job integrating these businesses. And when you think about integrating the businesses, don’t think about it like, hey, we’ve got them on our back office systems.

We’ve got them, you know, so they’re the the functional areas are reporting to the right folks and that, you know, we’ve harmonized benefits, all that kind of stuff. That those are relatively easy. The opportunity for these businesses is instead to put them into the broader Rockwell portfolio, to put it under that umbrella of, the assistance for and, and the expertise around the production environment, and bringing this whole host of solutions, the ways to win to those customers. And that’s what we’re talking about when we’re talking about putting the the entirety of this together and integrating these businesses. And that’s it’s a it’s a great opportunity for us.

The team has done a really good job. We’ve got a little bit more work to do. Now if the right transaction came around today, we’d, you know, we’d be looking at it. We’ve got a active active pipeline that we’re working. This moment, it happened to be timing wise good for us, so we were taking a pause because, frankly, not a lot of deals were getting done over the last twelve months anyways for a lot of other reasons.

So, you know, that the uncertainty in the market also created a lot uncertainty in the M and A market. So it hasn’t really hurt us all that much. But I think we’re gonna see more and more transactions start to, to come through just in the broader industrial universe. And, you know, Rockwell is open to participating, again, with the discipline around we want to be focused on that production environment.

Joe O’Dea, Analyst: And then you’ve talked about on the CapEx side and the willingness to invest a little bit more and talked about an asset light model. Expand on that a little bit, and then what that would mean from a spent dollars, what it would mean for percent of COGS that’s sourced versus made just in terms of understanding the magnitude of this kind of change.

Christian Rothe, CFO, Rockwell Automation: Sure. So, yeah, historically, Rockwell has been an asset light organization. And I’m not saying anything that is a a big surprise to folks. If you’d looked at Rockwell for quite some time, you’d notice that their, you know, CapEx spend is relatively modest. But on top of that, if you look at our balance sheet, there’s a lot you know, we don’t have a ton of assets on our balance sheet.

So the and and that’s a philosophy that works for a number of organizations. At the same time, we are still at our core. We’re an industrial company that manufactures a lot of stuff. And what we do as a a business and and how we actually sell to our customers is we sell to people that make things in a lot of cases. So, you know, there there’s no reason why we shouldn’t also be investing in ourselves to make our things.

And and so there’s a shift inside the organization that’s happening right now, where we are, looking to be a little bit more asset intensive. And, you know, to put that in, in context, okay, you know, historically, we’ve been about a 2% sales, CapEx spender. You know, does that number go up to 3%, potentially? But it’s, again, it’s really driven by the ROI that we get on those investments. And the opportunities, you know, coming out of the cost reduction and margin expansion work that we’ve done where we have really gone heavier after our, you know, our spend, our direct material spend.

And that that’s okay because when you’re asset light, you’ve got a larger direct material spend because you’re you’re actually spending it with outside parties that are doing a number of things for you. But the more we, look at it, the more we see opportunities to bring things in house. That is, you know, do the, the the buy to make analysis and, and start to do some of those things for ourselves. Essentially, spending some CapEx dollars, maybe a little bit of OpEx dollars, but we’re doing it to get a yield by removing other people from our profit pool. And so we wanna bring them in, bring those things in, and and push those other parties out and hopefully use that to expand margins over time.

And that’s just one aspect of it. Again, you know, asset light, you’re probably not gonna invest as much as you would in your facilities. Even though we are an automation company, we have still a pretty good runway on doing more automation, even in again, we’re more of a light assembly kind of operator today. And, you know, those assembly operations can continue to be, automated, which is great.

Joe O’Dea, Analyst: Great discussion. Thank you very much for being here. Really appreciate it.

Christian Rothe, CFO, Rockwell Automation: Thank you all. Appreciate it.

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